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Stock Building Supply Holdings, Inc. (NASDAQ:STCK)

Q4 2013 Earnings Conference Call

February 25, 2014 08:30 AM ET

Executives

Jim Major – Executive Vice President and Chief Financial Officer

Jeff Rea – President and Chief Executive Officer

Analysts

Luke L. Junk – Robert W. Baird & Co. Equity Capital Markets

Freda X. Zhuo – Barclays Capital, Inc.

Joey Matthews – Wells Fargo Securities LLC

Trey H. Grooms – Stephens, Inc.

Samuel H. Eisner – Goldman Sachs & Co.

Operator

Good morning ladies and gentleman, thank you for standing by. Welcome to the Stock Building Supply 2013 Fourth Quarter and Full Year Earnings Conference Call. During today’s presentation, all parties will be only in listen-only mode. Following the presentation, the conference will be opened for questions. (Operator Instructions)

As a reminder, this conference is being recorded today Tuesday the 25 of the February 2014. I would now like to turn the conference over to Jim Major, Chief Financial Officer of Stock Building Supply. Please go ahead sir.

Jim Major

Thank you, operator and good morning everyone. Joining on me on the call today is Jeff Rea our Chief Executive Officer. We hope you had a chance to review the earnings release for the company’s fourth quarter and full year 2013 results. If not, a copy is available on the investor relations section of our website at ir.stocksupply.com.

Before we begin, I would like to remind everyone that some of our comments today may include forward-looking statements. These statements are subject to the risks and uncertainties as described in the company’s filings with the SEC. Our actual results may differ materially from those described during the call.

In addition, our forward-looking statements are made as of today and the company does not undertake to update any forward-looking statements based on new circumstances or revised expectations. Lastly, all non-GAAP financial measures discussed during this call are reconciled to the most directly comparable GAAP measures in the tables attached to our press release.

I would now like to turn the call over to Jeff Rea.

Jeff Rea

Thank you, Jim. To all those participating with us this morning, welcome to Stock Building Supply’s fourth quarter and full year 2013 earnings call. I want to started off by thanking our stock associates for their significant efforts and continued team work to serve and help grow our customers’ businesses. Without their commitment and hard work, we would not be where we are today. 2013 was a milestone year for Stock. We celebrated our initial public offering in August, grew our business at above market rates, expanded our structural components and millwork capacity and continued to invest in other core capabilities to better serve our customers and grow our business profitably.

For the full year 2013, we grew revenues 27% to approximately $1.2 billion while reporting adjusted EBITDA of nearly $28 million compared to $2 million of adjusted EBITDA in 2012. In the fourth quarter, our business teams continued to deliver above market growth as we increased revenue 21% versus the prior year and saw very strong growth within our remodeling and custom builder segments.

This compares favorably to the fourth quarter increase since U.S. single-family stocks of 11%. As we look forward to 2014 we remain optimistic about the prospects for further recovery as the U.S. single-family new construction market is still nearly 40% below the 50 year average of million stocks. Therefore our near-term growth strategy remains the same and is designed to ensure our company is well positioned to take advantage of the recovery in U.S. residential construction.

In 2013, we executed on numerous initiatives to expand our product and service offerings within our geographic footprint. For example, in the Atlanta market, we successfully integrated the TBSG acquisition into our existing operations to provide structural components and enhance millwork capabilities to that large and recovering metro area. The acquisition and integration of Chesapeake Structural Systems in Virginia provided us the ability to manufacture structural components for our customers’ enrichment in Northern Virginia.

These investments combined with the solid execution of our sales and design teams help drive revenue growth and structural components up 48% on a year-over-year basis. Additionally, we are currently expanding our components capacity in the Utah and Carolina’s markets to serve growing demand that we’ve see for these services and products.

Within our millwork and interior products offering, we open a millwork fabrication plan in South Carolina during the second half of 2013 to serve our customers and Charlotte and South Carolina. We also increased our millwork fabrication capacity in the Houston market.

Each of these investments enhances our customer solution offering across footprint and in aggregate provides meaningful opportunities to continue to grow our business profitably.

Finally, we continue to invest in our remodeling business, we have made strategic and tactical investments in our local facilities to better serve professional remodeling contractors. During 2013, we refreshed our design centers and in-store merchandising in several Los Angeles, Houston, Austin, Salt Lake City and Washington, D.C. locations.

We believe improved layout design, broad product offering, and enhanced customer service resonates well with remodeling contractors and resulted in increased share in this customer segment. In fact, we grew our remodeling business by over 18% in 2013 or three times the IHS Global Insight and theory estimate for U.S. professional home improvement industry growth of nearly 6%.

We feel significant growth opportunities remain as our sales through remodeling contractors have approximately $200 million is only a small fraction of the estimated $81 billion of opportunity in this U.S. professional home improvement marketplace.

Before I provide comments on our 2014 outlook let me turn things over to Jim for a summary of our fourth quarter and full year financial results.

Jim Major

Thanks, Jeff. As we detailed in our press release, fourth quarter net sales grew to $305.2 million or 21% above the prior year period, while full year 2013 sales grew to approximately $1.2 billion, up 27% compared to 2012. For the quarter and full year, we accomplished above market growth rates in both our core new single-family construction and repair and remodeling customer segments.

For the full year 2013, we saw double digit sales growth across all of our product categories and in the fourth quarter, we saw stronger growth in several strategic product categories including structural components and windows and other exterior products. Structural components sales grew 40.3% in the quarter and 48% for the full year as we continued to see strong builder demand for components as a means to improve quality and minimize waste on their job sites.

Windows and other exterior product sales also experienced strong growth during the quarter of approximately 30% due to increased demand from our customer builder and repair and remodeling customers.

Gross margin during the fourth quarter was 24.2% compared to 22.9% in the prior year period; this increase resulted from a combination of positive factors including a greater sales mix of structural components and windows and other exterior products, improved gross margins on the sales of lumber and lumber sheet goods as well as increased consideration from suppliers due to higher purchase volumes.

The gross margin percentage for 2013 was 22.9% compared to 22.8% in 2012 and we have generated sequential improvements in gross margin in each of the past three quarters.

During the quarter, our selling, general and administrative expenses of $66.5 million were up $8.9 million or 15.4% from $57.6 million in the fourth quarter of last year. The largest single component of this increase was variable costs such as sales commissions, shipping and handling costs and incentive compensation, which increased by $4.6 million.

In addition, other salary, wage benefit and employer taxation costs increased by $3.8 million as a result of headcount additions to serve our increased sales volumes and captures sale opportunities.

SG&A as a percent of net sales decreased 110 basis points to 21.8% in the fourth quarter of 2013, while full year 2013 SG&A as a percent of net sales declined 220 basis points to 21.3% as compared to 23.5% in 2012.

In 2014, we intend to continue take a balanced approach to funding investments that drive above market growth, while also focusing on initiatives that lower our operating costs as a percent of sales.

Operating income in the fourth quarter of 2013 was $5.1 million, compared to an operating loss of $5.2 million in the fourth quarter of 2012. For the full year, operating income was $0.8 million compared to an operating loss of $18.9 million in 2012 and as a reminder during 2013, the company’s operating income was impacted by $10 million of IPO transaction related costs which included a $9 million fee for terminating our management services agreement with The Gores Group.

For the quarter, interest expense was $0.6 million compared to $1 million in the fourth quarter of 2012. Interest expense for the year was down $0.2 million to $3.8 million compared to $4 million in 2012; these decreases primarily resulted from lower average borrowing rates. We recorded $1.8 million of income tax expense in the fourth quarter compared to an income tax benefit of $2.1 million in the prior year quarter; this change was primarily due to the generation of pre-tax income from continuing operations.

The effective tax rate from continuing operations for the fourth quarter was 38.3%. Income tax expense for the year was $2.9 million compared to income tax benefit of $8.1 million in 2012. The non-deductibility of approximately $9.2 million of our IPO cost was a primary factor leading to an effective tax rate from continuing operations of negative 132.9% for the full year of 2013.

Net income during the quarter totaled $3 million, or $0.11 per diluted share compared to a net loss of $3.8 million or a loss of $0.36 per diluted share in the fourth quarter of 2012. For the full year, net loss was $4.6 million or a loss of $0.36 per diluted share compared to a 2012 net loss of $14.5 million or a loss of $1.83 per diluted share. The net loss recorded for 2013 was also impacted by $10 million of IPO transaction related costs.

Adjusted EBITDA totaled $9.6 million in the quarter compared to $3.1 million in the fourth quarter of 2012. For full year 2013, adjusted EBITDA was $27.8 million, up $25.8 million compared to $2 million 2012.

Adjusted income from continuing operations was $3.6 million in the fourth quarter compared to an adjusted loss from continuing operations of $0.5 million in the fourth quarter of 2012. For the full year of 2013, we recorded adjusted net income from continuing operations of $7.4 million compared to an adjusted net loss from continuing operations of $8.9 million in 2012.

Total liquidity at December 31, 2013 was approximately $72.1 million, which includes cash and cash equivalents of $1.1 million and $71 million of borrowing availability under our revolver.

As we mentioned in our press release, we recently increased the size of our secured revolving credit facility from $150 million to $200 million and also extended the maturity to December 31, 2017. This amendment also expanded the definitions used in calculating our borrowing base to allow advances for certain types of machinery and equipment. We believe this amendment further enhances our ability to capitalize on future growth opportunities while maintaining an attractive overall cost of capital.

Capital expenditures were $7.4 million for the full year 2013 and $4.9 million in the fourth quarter of 2013. Our spend, which accelerated in the fourth quarter was primarily related to purchases of delivery fleet and material handling equipment. We expect our capital expenditures to continue to increase in 2014 as we make further investments to capture sales growth and improve operating margins.

Finally, the weighted average common shares outstanding used in calculating diluted earnings per share for the fourth quarter of 2013 was approximately $26.2 million. As a reminder, the fourth quarter was the first full quarter since our IPO and therefore this was the first quarter where the share issuances and conversions that occurred at the IPO are fully incorporated into our weighted average share calculations.

I will now turn the call back over to Jeff for a few closing comments.

Jeff Rea

Thanks Jim. While we still have many things yet to accomplish and the strategic transformation of our company is just beginning, I feel we made nice progress on several fronts in 2013. We gained market share in our core customer segments, expanded our millwork constructional components capabilities and further enhanced our customer service competencies.

We anticipate sustaining these trends into 2014. However, many of our customers and markets have been impacted by adverse winter weather, which have dampened construction activity and our growth rates quarter to-date. As we look ahead to the balance of 2014, we are optimistic about improving trends in the residential construction market and we intend to accelerate investment in critical growth resources, further expand and leverage our technological capabilities and when appropriate expand our footprint with organic and inorganic investments.

Thanks again for joining us today and your interest in our company. Moderator, could you please open the line for questions.

Question-and-Answer Session

Operator

Thank you. At this time, we’ll conduct a question-and-answer session (Operator Instructions) our first question comes from the line of Luke Junk with Robert W. Baird. Please proceed with your question.

Luke L. Junk – Robert W. Baird & Co. Equity Capital Markets

Good morning guys.

Jeff Rea

Good morning Luke.

Jim Major

Hi, Luke.

Luke L. Junk – Robert W. Baird & Co. Equity Capital Markets

So Jeff, three questions this morning would be with the quarter off to a weak start due to the adverse weather that we’ve seen here, could you maybe speak to your ability to make up some ground in March assuming the weather normalizes and also as that, then you experience that, these would be lost sales or simply the sales would be deferred into later in the season?

Jeff Rea

Sure Luke. Yes, clearly the weather we’ve had this winter is no new news to anyone. The real question is the impact on our business and our customers’ business which you are referring to, no doubt there is a couple of things here that I think are worth highlighting. First of all, first quarter is always our weakest quarter of the year just due to normal winter weather and the seasonality of our business and our customers’ businesses.

So for example, last year, Q4 to Q1 in spite of a robust market and increasing inflation especially in the commodities, we were down approximately 2% quarter-over-quarter. We expect that to be worst this year given the increased weather issues that we’ve seen, but still see strong robust demand and it’s just a matter of time. We believe until the builders can get out and get their foundations in and get back up to the rates that they anticipate based upon the fundamental demand that they see.

And so to your other question, we would expect to see that business come to us at some point in time. The wildcard here is and when is it, March, is it April, how quickly those will recover, obviously we still got a lot of the first quarter to go, still more weather risk out there, but from our perspective, we are not concerned at all about the dynamics that we see in our business relative to the full year of 2014, but understand that there is going to be some challenges here in the near-term.

Luke L. Junk – Robert W. Baird & Co. Equity Capital Markets

It’s helpful and then a follow up on gross margin, Jim, obviously both up nicely year-over-year and sequentially, just wondering how we should think about the gross margin level going forward. I will think that the positive mix and improved selling margins would be largely sustainable while the rebates maybe reset somewhat in the New Year, is that the right way to think about the margin from here?

Jim Major

Yes, I think that’s right and roughly 60 basis points of the overall year-over-year improvement in the fourth quarter was related to some of the higher supplier consideration. Obviously many of those programs were on the annual basis and have some tiers and with the higher purchase volumes this year that allowed us to capture some of those higher dollars here as we got towards the end of the year, so.

Luke L. Junk – Robert W. Baird & Co. Equity Capital Markets

Okay. And then just a last question; any commentary in the acquisition pipeline and your desire to do deals with the recent expansion in the credit facility?

Jeff Rea

Yes, the desire is still the same as it always has been and as we’ve discussed. We’re very interested in the right strategic acquisitions that would either strengthen our current markets and footprint or strategically fits with our longer terms goals. So we can’t really comment on any specific deals, but we are continuing to evaluate and build a pipeline and we are in position with the balance sheet that we have to execute on those deals opportunistically.

Luke L. Junk – Robert W. Baird & Co. Equity Capital Markets

Thank you.

Jim Major

And I think beyond that obviously the credit line expansion was there also to fund further growth in working capital and some of the capital expenditures and organic opportunities that we see, the ability to capture here in the business as well, so.

Jeff Rea

That’s a good point Jim. We again will opportunistically pursue the acquisition opportunities as they make sense, but we are really excited about the organic opportunities in our business and that’s our main focus.

Luke L. Junk – Robert W. Baird & Co. Equity Capital Markets

Thank you.

Jeff Rea

Thanks Luke.

Operator

Thank you. Our next question comes from the line of Stephen Kim with Barclays. Please proceed with your question.

Freda X. Zhuo – Barclays Capital, Inc.

Hi guys, this is actually Freda Zhuo on for Steve. Congratulations on a great quarter.

Jeff Rea

Thanks Freda.

Jim Major

Thanks Freda.

Freda X. Zhuo – Barclays Capital, Inc.

So the question I had was kind of following up with the previous questions in terms of just a higher level of gross margins that you are seeing, that are probably sustainable going forward, in the past you had mentioned kind of this 50% kind of EBITDA pull-through gross margins. So looking forward in the normalized type of environment, can we expect that the incremental EBITDA margins perhaps be a little bit higher. And then what you’ve previously guided to?

Jim Major

I think, when you step back and kind of the look at the full year for 2013, our EBITDA pull-through was right around 10% of sales. Certainly that’s a level that we are happy with and one that we would continue to see to repeat.

Freda X. Zhuo – Barclays Capital, Inc.

All right great. And in terms of just looking at some of the updated single-family revenue per start, the last number that we have was about 1,400. Can you kind of comment on what the most recent numbers are in? What are the biggest puts and takes into really driving that increased revenue?

Jeff Rea

As you mentioned our revenue per start increased nicely year-over-year about 13% in 2013 versus 2012. And we saw nice momentum in both the single-family segments and as mentioned the repair and remodel segments really started to accelerate as some of our investments started to pay-off. And so we anticipate that we can maintain the kind of growth rates in the sales per start into 2014. And quietly frankly, we are investing to continue to maintain this growth as we are picking up new customers, as we are servicing more jobs and obviously trying to sell more into each job or increase our share well.

So that’s a core strategy for us and it’s something that we are fundamentally focused on so, we feel – Freda, I would feel good about the momentum we see outside a lot of opportunities to continue to invest in our core business to improve our product mix and our ability to serve these customers that fundamentally will drive that metric and ultimately drive the revenue.

As Jim mentioned, our sales pull-through the EBITDA target is about 10% quarterly, in the first quarter we are investing and started to invest late last year and continuing to invest in the first quarter to make sure we have the ability to serve our customers well as we go through 2014 and even into 2015 and take advantage of the opportunities that we see. And so that metric is a longer term metric for us as far as capturing and pulling through the EBITDA from the revenue growth that we are driving.

But in the near-term we could see that come down a little bit as depending on what the weather actually allows us to sell here in the first quarter and the impact. We may see a little bit of the deceleration clearly in the first quarter, but feel good about the full year 2014.

Freda X. Zhuo – Barclays Capital, Inc.

Okay, great. Thanks guys.

Operator

Thank you. Our next question comes from the line of Adam Rudiger with Wells Fargo. Please proceed with your question.

Joey Matthews – Wells Fargo Securities LLC

Hi this is Joey Matthews on for Adam. How are you guys doing?

Jeff Rea

Hey Joe.

Joey Matthews – Wells Fargo Securities LLC

I wanted to ask about your mix of sales in 2013 relative to 2012? Looks like your custom builder sales went from 35% to 37%. While your production builder share was flat at 37% remodeling, so actually modeling inched up from 17% to 18%. I was just wondering what success or how you are having success in the Custom Builder segment? Is it more of a – more sales per customer? Are you just being more aggressive in winning new customers and some of the dynamics and differences between the customer and production builder at this momentum?

Jeff Rea

Good question Joey. We really don’t differentiate between those two customer segments. We want to serve their needs, both the production builder and the custom builder as you define them are critical in core customer segments for us. And we are working to support their needs very similarly regardless of which category they fall in. We did see a little bit more attraction with the custom builder in 2013, and we saw very growth with this segment in the fourth quarter as we did with the repair remodel contractor customer segment.

And so, we’re really set up to serve both of those segments repair and remodel and new construction that very effectively and continue to invest in that. So I wouldn’t say that there is really anything different from that of the strategy and some of the topics that we just highlighted.

Joey Matthews – Wells Fargo Securities LLC

Okay, and then for the fourth quarter revenue growth is there anyway you can breakout the contribution from TBSG and Chesapeake and that impact on the revenue growth?

Jeff Rea

Yeah for the fourth quarter, it was just around $8 million for each of those acquisitions.

Joey Matthews – Wells Fargo Securities LLC

Okay and then, looking at Q1 gross margins again just trying to understand if it’s going to be a tailwind or headwind, those two comparisons on year-over-year change in lumber and lumber related goods if you could help us.

Jeff Rea

Yes, I mean if you are going back to the first quarter last year, I believe we are at 21.6% and that was certainly in a compressed via some of the [Indiscernible] new inflation that was occurring at the time as we sit here today that the lumber markets are reasonably or certainly less volatile than they were a year ago and at levels that are pretty similar to where they were a year ago. So from a percentage standpoint we would expect to have year-over-year improvements. Then I think sequentially as I said we had a little bit of a benefit in the fourth quarter roughly 60 basis points from the supplier rebates. So that would be something that would probably fall off sequentially.

Joey Matthews – Wells Fargo Securities LLC

Great and just one last one on – you breakout your revenue growth in Q4, volume versus prices and price was up just 2.3% year-over-year. How do we think about that in terms of mix versus actual price increases?

Jeff Rea

So what we are trying to capture there is the price increase associated with the commodity products. So obviously that’s the element that can be more volatile in our business and so it is the actual selling prices or the average selling prices I should say on those commodity categories.

Joey Matthews – Wells Fargo Securities LLC

Okay. And if I could please one more and on CapEx, it was about $5 million this quarter. Any guidance on 2014 and what percent would be maintenance versus growth?

Jim Major

Yeah so in 2014, we certainly expect that to continue to increase at the end of the year. We’ve had roughly $9 million of free material handling equipment on order, so that will come through in kind of the first quarter and maybe as build into the second as well.

It’s a mix frankly of some growth, the needs that we have obviously serve higher volumes and make sure that our service levels don’t slip as well as some replacement opportunities, where we can minimize repairs, frankly improve fuel economy and some of those other things that add to the operating productivity of the business as well, so next year’s CapEx should be sum of each.

Joey Matthews – Wells Fargo Securities LLC

Great.

Jeff Rea

We are clearly starting to invest in bringing up some new facilities to serve the growing demand that we see in our structures in millwork businesses and so that will be growth CapEx needs that our business has the discipline to ensure that we are able to take advantage of the arriving market.

Unidentified Analyst

Great, thank you.

Operator

Thank you. Our next question comes from the line of Trey Grooms with Stephens Inc. Please proceed with your question.

Trey H. Grooms – Stephens, Inc.

Hey, good morning Jeff and Jim.

Jeff Rea

Thanks, Trey.

Trey H. Grooms – Stephens, Inc.

Jeff, on the underlying demand that you guys are seeing when obviously the weather has been difficult so far in 1Q, but on the days when you actually when weather breaks, can you talk about kind of the underlying demand that you are seeing there relative to as what you would normally expects seasonally?

Jeff Rea

Hopefully, we are going loose everyone there, but, yes, good question Trey, the weather is the challenge for the sure and that kind of muddies the water from our perspective and not only just though winter events if you will, but just the colder temperatures and the ability for builders to get out and start to develop a lot.

With all that said, we are seeing good underlying demand and as we are talking to out builders, they feel very good about the balance of 2014 and so that’s why we feel very confident and continuing to invest in our core businesses make sure we got the capabilities to scale effectively as we go thorough 2014 and even in the 2015, because that’s kind of where we are at in our transformation as we are looking out a couple of years and making sure we are doing the right things in this company to take advantage of the longer term opportunities that we clearly see in front of us.

Our repair remodel business highlighted has been very strong and something that we are very excited about because its such a small piece of what we did today, but is growing nicely and something that we think we can sustain with the right investments and the right focus and it balances the new construction piece of our business longer term.

So, that Trey is that’s kind of the way we are thinking about our business in the near term, making sure we are doing the right things.

Trey H. Grooms – Stephens, Inc.

Sorry about that. I don’t know if you guys can hear that, but sorry. My phone is blowing up here. Okay, just real quickly, looking at repair and remodel, how does the R&R approach or channel differ from kind of the new way as channel and you approached it, how you got to market for both of those? How is it different, what are the primary products you are supplying there? I would assume it’s much like lumber intensive, but given its focus on R&R, can you help kind of give us a little bit more clarity on how the two side of the business really differ from those different perspectives?

Jeff Rea

Yes. On the product side, it’s very complementary. On the service side, there are some uniqueness is specifically, the product assortment sometimes is slightly different, a little bit different windows at times that now we sell lumber, we sell sheet goods, we sell the same products we sell under the construction market, we sell primarily into the R&R market. So there is a lot of synergies on that front.

The local service aspect is really the difference and making sure that you are targeting and understanding these professional contractors needs obviously there is a multiple segment within the professional contracted segment at different specialties and so forth that you need to take into account and figure out how to serve locals. So its highly, highly fragmented market and something that we spend a lot of time on a local basis looking at thinking about and then getting after.

So we have invested, all our investments are primarily on the local level here that recently have been driving improved performance, but strategically we think it’s a big segment and something that we want to continue to focus on the target and investment.

Trey H. Grooms – Stephens, Inc.

So will it be safe to say since you have it sounds like its of course more local, but possibly even a higher touch business, is it safe to say that the margin profile of the repair model segment would be better than the overall margin of the more single-family focused side of the business?

Jeff Rea

I think that it’s safe to say in general, it clearly is higher taxing sometimes can be higher service at higher service requirements, therefore maybe a little bit higher cost to serve. So you have to make sure you are getting the value there, we have been successful in doing that.

Trey H. Grooms – Stephens, Inc.

Right I understand. And then one last one for Jim, looking at SG&A leverage, as we look into 2014, assuming all of our outlooks for housing improvements and things likes that continue, should just the overall magnitude of leverage there as we look it kind of SG&A as a percent of Revs, should it be similar to what we saw in 2013 or should there be continued improvement, any color you could give us there?

Jim Major

Yes, I mean obviously for the full year of 2013, we are down about 220 basis points I think that will be some, it’s a little bit of diminishing returns there as the base gets smaller and smaller I think the other aspect is as Jeff said as we continue to target higher margin opportunities and grow that as a percentage of our sales, there can be some tradeoff there in term of the cost that servers and that’s why we feel good about kind of the 10% pull through on incremental sales for the full year, but as we said that there maybe some tradeoffs there with some higher margin sales maybe being slightly higher cost of sales or if the inverse happens, could be some dynamics between the gross margin percentage in SG&A along this line, but we need the scenario to get you back towards that 10% overall pull through on incremental sales.

Trey H. Grooms – Stephens, Inc.

Great, thanks for color there and good work in the quarter and good luck.

Jeff Rea

Thanks

Operator

Thank you (Operator Instructions) Our next question comes from the line of Samuel Eisner with Goldman Sachs. Please proceed with your question.

Samuel H. Eisner – Goldman Sachs & Co.

Good morning everyone.

Jeff Rea

Good morning Sam.

Jim Major

Hi Sam.

Samuel H. Eisner – Goldman Sachs & Co.

I was wondering if you could maybe, talking about 2014 , could you may be give a little bit more granularity on what your expectations are for housing starts and if I look at your growth rates, for 2013, it seems that you grew about 2x of the market or 2x of the new starts market, so I’m wondering if that relationship should still hold again in 2014?

Jeff Rea

Certainly there were some inflation benefits for the full year of 2014. So as we sit here today that certainly likely to be lots of a positive factor in 2014 than it was from 2012 to 2013. I think to answer your first question, obviously, we read all the same reports and consensus that’s out there. I think 15% to 20% increase in U.S. single-family start seems to be a consensus and certainly it seems reasonable in light of the growth rates that they were experienced in 2013. So we tend to be somewhere in that range there.

Samuel H. Eisner – Goldman Sachs & Co.

Great and then, thinking about the investments in 2014 you mentioned the CapEx is certainly going higher, is that all of a cash expense or is anything there running through the P&L and should we expect any increases in G&A that would then effect your profitability in 2014?

Jim Major

You could see some marginal increases in G&A, obviously there is other assets that continue to be fully depreciated than we like, so I think it’s a percent of sales it should hold relatively steady.

Samuel H. Eisner – Goldman Sachs & Co.

And then when I think about mix during 2014, I think that at least the products that you sold this was from a point of percentage basis, this is the strongest quarter and about eight or maybe more than eight quarters of windows, but also the weakest in lumber. So curious how you guys are thinking about mix with the product mix entering 2014?

Jeff Rea

Yes, for the full year we really don’t see much difference than we saw in 2013, obviously we want to continue to emphasis the value added products and have been adding capacity structures in millwork to make sure that we can serve that demand. As you’ve noted in the fourth quarter, our lumber and commodity sales were down significantly, growth rate was about 6% from the growth rate for the full year and that was intentional in a lot of ways because we saw some pricing that we weren’t comfortable with.

This is a high service segment and typically lower margins and we just started like some of the competitor bids out there, it just didn’t make sense for our business and so we were very disciplined in our pricing approach. However, we anticipate that we’ll continue to see overall for 2014 growth rate similar to what we saw in 2013 in this segment. Hopefully that answers your question.

Samuel H. Eisner – Goldman Sachs & Co.

Yes. And then just lastly on the gross margin expansion in the quarter, I don’t want to continue to reiterate it, but am I right to assume that about half of that gross margin expansion is sustainable while the other half is not, is that the right way to think about it?

Jim Major

Yes, I think in terms of individual quarters, I think that’s in the right ballpark.

Samuel H. Eisner – Goldman Sachs & Co.

All right. Well I let you [indiscernible].

Jim Major

The other thing that kind of think about is, if you assume out from the individual quarters, we’ve had about 70 basis points of improvement over the last couple of years, I will call it 30 basis points to 40 basis points per year, certainly as the market continues to improve, we would be very comfortable and expect those types of improvement so for all on kind of an annual basis.

Samuel H. Eisner – Goldman Sachs & Co.

Great, thanks so much.

Operator

Thank you. There are no further questions at this time Mr. Rea, I will turn the floor back over to you for any closing comments.

Jeff Rea

Thank you and again thanks for your interest in our company. We appreciate your time and intention, and wish everybody a good morning.

Operator

Thank you. That concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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